As they usually do, the baby-boom generation is having a profound impact on retirement.
In Canada for example, new retirees jumped from 170,000 annually five years ago to 250,000 now.
In five more years, the number will rise to 400,000 annually. In North America over 10,000 people retire every day.
That’s an insane number.
That translates to 1200 people retiring every hour of an eight-hour working day!
Another significant change is in the area of longevity.
In 1950 the average life expectancy was 68. This means that once you reached a retirement age of 65, on average you only lived for another three years. By the year 2000, average life expectancy had risen to 76, and by 2010 life expectancy was age 81. So the average of years in retirement increased from 3 years to 13 years. That's an additional 10 years of income needs.
The fastest-growing age group in North America is between the ages of 60 and 64. In late 2015, stats Canada announced that for the first time there were more Canadians over the age of 65 than under the age of 14.
The facts of aging and longevity will have profound impacts on the retirement landscape over the next several decades.
Over the next few decades, from a demographic standpoint, Canada will experience population shifts that will have far reaching impacts on our society and the financial health of our Nation.
At a national and local level, it’s imperative that a debate take place around these impacts that will lead to the introduction of policies to deal with these issues:
Pressure on our health care system
Loss of highly skilled workers unless the employment system becomes more accommodating
Embracing of immigration from other countries to fuel the employee/worker growth needed in many sectors of the economy
Pressure on the pension system
A number of significant risks could affect Canada’s long-term fiscal sustainability, including demographic changes, climate change, and aging infrastructure.
These challenges make it important for the government to understand the budgetary impact of existing policies and policy options on the country’s long-term fiscal position and the sustainability of public finances.
The charts included in this post summarize the result of an analysis of Canada's fiscal situation.
The focus of the analysis was on how the Department of Finance in Canada analyzes and considers long-term fiscal sustainability (which could be affected by demographic changes) in the process of making policy recommendations and how it reports long-term fiscal analyses.
The report confirms that Canada’s population is aging rapidly.
Canadians aged 65 and older now make up 14.4% of the population, compared with 13.3% in 2006. In 40 years, seniors will account for almost a quarter of the country’s population.
This demographic shift could weaken the fiscal position of governments by decreasing participation in the labour force, thus reducing potential economic growth as well as growth in government revenues.
An aging population will also put upward pressure on health care costs and pensions.
In this context, if interest charges on the public debt grow faster than the economy and unless revenues increase or spending levels decrease, the federal government could face an unsustainable budgetary position in the long run.
Statistics Canada Chart Unpacked
The image on the chart is a classic Christmas tree.
You’ll notice a large demographic cohort at the bottom working to provide tax revenues to look after pensions and healthcare for those individuals at the top of the demographic tree. This was the situation back in 1971.
By 2011 the Christmas tree was beginning to take a decidedly different shape. By the year 2051, the demographic shape looks like a cylinder.
The impact is far fewer people at the bottom of the demographic pyramid will be contributing tax dollars toward the financial needs of people at the top of the pyramid who will need pensions and healthcare.
You don’t have to be a rocket scientist to forecast the looming problems retirees will be facing as a result of these massive demographic shifts.
The fiscal squeeze chart (above) is a dramatic example of the potential impact on the future state of government spending as a result of demographic changes.
Economists expect that revenues will plateau and expenditures for healthcare and government pensions will aggressively grow. This analysis was prepared before COVID 19.
It will be an even more concerning chart once the post COVID numbers are included!
To put these spending increases into perspective, when combined, the higher projected government spending related to health care and income support programs for seniors (OAS, etc.) would be equivalent to spending an additional $107 billion on these same programs over and above what governments in Canada spent in 2016.
In response to this dramatic demographic shift, and the resulting higher spending and slower revenue growth, governments across Canada will face stark choices. They will have to reform spending programs, enact policies to improve economic growth, run deficits and accumulate debt, and/or raise tax rates.
If governments—including the federal government—continue to choose deficits and debt, Canada’s net debt-to-GDP ratio (a metric economists use to measure the sustainability of government debt by comparing it to the size of the economy) could increase to between 167% to 252% by 2045.
Even more problematic is the fact that most western national governments, state governments, and provincial governments, as well as municipal governments, are struggling under large debt levels and regular deficits. They don’t have enough margin in their financial structures to properly deal with this demographic tsunami.
One of the biggest takeaways from this trend is the necessity to take personal ownership and responsibility for your long-term retirement income planning and financial independence.
5 ways to do this are:
1. Make sure you are maximizing pension contributions.
It’s important to understand your pension. <- Watch this video for clarity
How is it indexed against inflation?
Is it integrated with Canada Pension Plan payments?
Do you have an up to date estimate of your pension income from your pension plan administrator?
Is there a option for lump Sum payment? What are the Pros and Cons to that?
2. Use your TFSAs effectively.
These are powerful vehicles that are often used ineffectively from an investment perspective.
They shouldn’t be used as a basic savings account earning you next to nothing. The video is hyperlinked for you.
The compounding growth in this account is TAX FREE so this is where you want to be earning a higher return and not just a savings interest rate of 1.6%. Inflation is 2% and so earning below that in a TFSA is really not taking advantage of it’s true power.
3. Know your numbers. <-- watch this
·How much will you need in retirement?
What returns will you need based on your portfolio size and income needs
What age will you retire?
Pension numbers?
4. Have a plan – not an idea.
Canadian statistics have shown that many Canadians who say they have a retirement plan actually, when prompted further, admit that this plan is in their head.
It’s extremely important to have a plan that is not just an idea in your head.
The plans we customize help our clients answer important questions.
What are your financial goals, what are your inspirational goals?
What will you be doing in retirement? What will your costs be?
How old will your kids be when you retire?
Will you want to help them financially with their wedding or schooling or home purchase?
Do you have a cottage? What is the succession plan for that cottage?
Are you taking care of your parents?
Do you have a disabled child you need to look after long term?
Are you remarried – part of a blended family? What does that look like from an estate perspective?
Should you take CPP early? <- one of our most watched videos
The answers to these types of questions work together in order to build a comprehensive plan tailored to help you achieve your goals.
Here’s a few useful guides/checklists PDFs:
5. Work with a retirement coach.
I know this might sound self serving but the reality is that the statistics don’t lie. Advised households do better than the DIY approach.
Households that work with a financial planner/retirement coach have better results for a variety of reasons.
1. Accountability
One of the more common behavioural pitfalls investors make is allowing fear or emotion to guide their decisions.
During difficult market conditions or life transitions, we are here to provide an unbiased perspective in addition to holding you accountable to the goals you have identified as part of your plan.
We ensure that your plan is revisited regularly in order to ensure that it remains current and aligned with your goals.
Here’s a quick video that explains our retirement coaching program – Retirement Coaching Explained
2. Experience & knowledge
Most people retire once.
I’ve helped 100’s of families retire successfully.
There are a lot of moving parts during this transition and some decisions you can’t reverse!
Working with a retirement coach who can help you navigate these decisions is important. Your coach can anticipate future changes and proactively coach you through the decisions related to these changes.
3. Peace of mind
Whether it’s navigating into retirement or navigating through market volatility, clients often mention the peace of mind they experience because we walk beside them through good times and bad.
You cannot control the impact demographics and the corresponding effects that these changes will have on government programs, and your tax bill.
However, you can take control by developing a customized plan that will help you navigate these demographic and fiscal changes with confidence and peace of mind.
Life changes and when that happens, money changes. Having a plan in place allows you to put together all the moving pieces and adjust them accordingly using your goals as the guiding true north of your plan.
Take a minute to reflect on all the questions listed above in this blog.
Do you know the answers?
Here’s a retirement checklist we recommend you use to start putting together the pieces.
If you are not working with a planner or would like a second opinion on your plan, don’t hesitate to contact us in order to set a meeting time with our office. We welcome the discussions!
Sincerely,
Shaun
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